The Effects of the 1.03 Million Yen Ceiling in a Dynamic Labor Supply Model
The Effects of the 1.03 Million Yen Ceiling in a Dynamic Labor Supply Model (DOI: https://doi.org/10.1111/j.1465-7287.2008.00115.x) was written by Yukiko Abe in 2009. It was published in Contemporary Economic Policy vol. 27.
There is a structural incentive surrounding women's income in Japan. If they make less than 1.03 million yen:
- they can claim social security and health care benefits through their husband at no additional premium
- their husbands can claim additional tax deductions
- culturally, companies typically give an additional allowance to men with a combined household income below some threshold
Married women seem to be adjusting hours worked around this threshold, distorting the labor market. This also has consequences for equity.
The author formulates a dynamic model of part time labor market participation. It focuses on the 25 years between ages 35 and 60 for married women.
Preference for leisure is assumed to increase with age. Utility functions based on income are assumed to be increasing but concave. A married woman is also assumed to select a number of hours to work to maximize this household utility.
A budget constraint is constructed with standard form, but a means tested transfer (MTT) is introduced to the model to capture the structural incentives around income for married women. This is a discontinuous function defined as a variable amount if household income is below a threshold, and 0 otherwise. By introducing this, the budget constraint is nonlinear and nonconvex.
Optimum allocations within the system are solved with MP methods.
The MTT reduces chosen hours of work and the number of years in which any work is chosen (i.e. retirement). There is also a spillover effect where chosen hours worked are increased in later years that are not bound by the MTT (i.e. to compensate for fewer hours worked overall).